As Equities Rise, the Dollar Will Fall

Earnings season is in full swing in the U.S. and impacting investor sentiment on a daily basis. The building of a run of reports that match or exceed expectations (or not, as the case may be) will be key for where equity markets move to in Q3 and Q4.

It will not necessarily require stellar earnings to draw in the flood of mutual fund cash that looks to have been sitting on the sidelines; a read of 'as expected' or higher sets up the possibility of a move up in stocks.

We are not looking to be perma-bulls on the stocks market, and will not create an unrealistic expectation on where things could, or should, go. Moreover, we are noting that whether they are seen as good value, overpriced, underweight, whatever the talking heads opinions are, wherever stocks travel in the next two weeks will very likely impact the next period of forex trade.

Trying to predict year-end, third quarter or month end direction is a fools game; this is a game being played without a rule-book, and 'normal' is what is being set each day as the global economic environment tests, refines, and re-writes the new rules that related to trading and investing in the post credit-crisis era.

However, forex values are being set on risk tolerance levels, and not on the 'normal' read of interest rate, forward growth, and debt ratios that previously were the norm. As such, we will see a higher correlation to equity trade in H2 (second half of the year) than many would like and probably expect.

The issue with moving away from regional growth/debt valuations and over to risk-tolerance reads off equity trade is that the three global trading sessions in each 24 hour period create micro business cycles that run valuations up and down throughout the day. It produces a trader environment that gets caught in a channel that easily reverses every eight hours.

That will be the norm until equity markets break and hold some major price point areas. At that stage, forex trends will return, pending orders will be able to be more easily placed, and stability will reign.

That comes with a break of 950 going long, and 890 going short, on the S&P futures market, it would seem. Anything in between is nothing more than noise; tradable noise, but noise nonetheless. The frustration of staying in the range is having to listen to so many non-trader opinions of why we are in the current environment, and how things will be at year-end.

Oh please, S&P, break the range soon, so that they can go on mute for a while. Either way, long or short, anything to stop the endless dribble that is spouted on a subject that nobody has seen before, and by few that actually trade their own pearls of wisdom.

Without having a normal environment, without having a rule-book to play the game, and without ever seeing these circumstances before, how can anybody predict the outcome? We know the links, they are still in place, and as traders have seen and traded five recessions, but the relentless increase in unfounded opinion for a 15 second slot of fame is getting deafening.

The spider's web of trading is in place; a pull on equities on one side creates a push on the dollar on the other. The simple equation in the game being played right now is: equities and oil higher = USD lower.

Comments

[Maxe Paul:]

You wrote an entire article on this statement?
"equities and oil higher = USD lower."

I just wasted 30 seconds of my life!

Jul 19 09:23 AM

[Philman:]

Contrary to popular belief, if the market were really rising because of its own merits, the dollar would be rising with it, because there would be a demand for dollars with which to buy stocks. That was the situation that prevailed in the late 1990s when, in spite of record trade deficits, the dollar rose because people wanted to buy U.S. based stocks.

This rally, however, is artificially created, by the PPT banks, on behalf of their Federal Reserve slush fund. They print dollars, hand them over to derivatives dealers to buy long on index futures, the arbitragers go into action equalizing the cash market to the futures, and the stock market goes up...and the dollar goes down. It will continue as long as the Fed keeps printing cash, and will stop as soon as the Fed stops. But, then, probably, the market will crash, because real investors don't want to buy this market.

Jul 19 11:29 AM

[capt Brian:]

good article

Jul 19 04:48 PM